Carats and sticks

A resource-rich government takes on foreign mining firms

Mar 31st 2010 | ACCRA | From The Economist print edition

BRITISH colonialists called Ghana the Gold Coast. To this day it remains Africa’s second-biggest producer of the metal, after South Africa, and the world’s ninth-biggest. Five foreign mining firms are digging huge open pits to get at the gold, encouraged by recent record prices. But the country, once seen as one of Africa’s most welcoming jurisdictions for mining firms, is now becoming more exacting.

Ghana’s parliament has voted to increase royalties from 3% to 5%, although the president has yet to sign the bill. In February the country’s environmental regulator suspended production at AngloGold Ashanti’s Iduapriem mine because the mine’s tailings dam, which stores cyanide-laced waste, was almost full. Last year the agency prevented Golden Star Resources, a Canadian firm, from expanding a mine where it had failed to fill an abandoned pit. Most notably, earlier this year it fined Newmont, the world’s second-biggest goldmining firm, $4.9m over a cyanide spill at its Ahafo mine.

The immediate cause of the increase in royalties is a budget deficit of almost 10% of GDP. But underlying it and the increasingly strict enforcement of environmental rules is a sense that Ghana is not getting much benefit from its mineral wealth. Gold accounted for 40% of exports in 2008, with a value of $2.2 billion. But the government received only $116m in taxes and royalties from mining firms—less than 4% of the country’s total tax take. “When you come here as an investor,” says Sherry Ayittey, the minister of the environment, “don’t come to mine and pollute the water bodies, repatriate your profits and leave our people suffering.”

Mining firms, predictably, are unenthusiastic. They say a new royalty regime could deter future investment and, in some cases, violate existing agreements. The government, in turn, is trying to renegotiate those agreements. Billy Mawasha, who runs Iduapriem, says his firm is not dogmatic, but had hoped that “the investment agreement would stay in place as it is.”

In rich and poor countries alike, taxes and royalties tend to gyrate with commodity prices, as governments seek to cream off a greater share of profits in good years and stimulate investment in lean ones. Several other African countries, including Tanzania and Zambia, have gone backwards and forwards on royalties in recent years. But Ghana’s new tack is noteworthy since the country is in the midst of an oil boom. Several Western oil firms are developing fields off the country’s coast. Production is likely to start next year, and to bring in far more money than mining. The government hopes to capture more than a third of the proceeds in one way or another. It is even arguing over a big investment by Exxon Mobil—a sure sign of resolve.